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UK government debt sales are expected to decline for the first time in four years, a sign that Chancellor Rachel Reeves’ efforts to rein in borrowing are easing pressure on the gilt market.
Big investment banks expect £247bn of gilt sales by March 2027, less than the £304bn Britain is raising in the current financial year, according to an average of seven estimates.
The decline in issuance is expected with next week’s spring forecast for public finances – which will be the first since the 2023 fiscal year – partly due to a lower bill for the refinancing of debt maturing in 2026-27. But it has also been strengthened by a reduction in the government’s borrowing needs following a massive increase in taxation.
Although gilt sales remain high by historical standards, investors have become more optimistic on the supply-demand outlook for gilts at a time when other large economies such as Germany and Japan are expanding their issuance.
“The UK has learned from bitter experience that the market will not tolerate deficit-driven growth,” said Mike Riddell, fund manager at Fidelity International. “Other countries have not yet been forced to change their stance.”
Officials will hope the shift in government credit supply will help rein in borrowing costs that rose to a 16-year high of 4.9 percent last year. They have since fallen to just above 4.3 per cent as Reeves’ tax-hike November budget fueled a rally in gilts.
After initially scaring the market with its spending plans, the Labor government doubled its head over its borrowing limit in the budget to £22 billion. The picture was further improved by the government’s record £30 billion surplus in January.
Government borrowing between April and January was £112.1 billion, down £14.6 billion from the same period in the previous financial year. The figure was also lower than the Office for Budget Responsibility’s forecast of £120.4 billion for the period.
A senior rates trader said January’s public finance figures were a “big boost” for the government: “It gives them more breathing room to do what they need to do.”
The spread between gilt prices and interest rate swaps of the same duration, a measure of market concerns over an oversupply of debt, has narrowed to levels not seen before the Labor government’s first budget in October 2024.
Ten-year gilt yields are 0.14 percentage points higher than equivalent swap rates, while investors were seeking 0.3 percentage points more during last year’s gilt selloff. The UK has also reduced the share of long-term debt it issues, which has helped keep long-term borrowing costs under control.
Lower gilt yields are likely to provide a modest boost to Reeves’ headroom against a key fiscal rule requiring him to eliminate borrowing except investment by the end of the parliament.
Ruth Gregory, UK economist at Capital Economics, said lower gilt yields should add £1.5 billion to Reeves’ headroom in the November budget forecast.
However Rob Wood of Pantheon Macroeconomics warned that political instability will remain a factor weighing on gilt markets in the coming months, noting the risk that Prime Minister Sir Keir Starmer’s Labor Party will suffer a poor showing in this week’s Gorton and Denton by-election races as well as local elections in May.
“I think the market underestimates the pressure on the government to spend more,” Wood said. “The government is highly unpopular and is unlikely to use any reforms in the public finances to reduce debt or keep debt on a lower trajectory than otherwise.”
